IRS Posts Form 706 Final Return and Instructions

On Oct. 4, the Internal Revenue Service posted final Form 706 for individuals dying in 2012. It posted final updated instructions on Oct. 12. Here’s an overview of the new form and instructions and how they compare to the prior versions.

Portability Opt Out Highlighted

As in the draft form, the new Part 6–Portability of Deceased Spousal Unused Exclusion (DSUE), states that to elect portability of the DSUE amount, the executor of the estate of a decedent with a surviving spouse must complete and timely file Form 706. No further action is required.

There’s a box to check to opt out of portability, which the IRS has highlighted by creating a separate section for it: “Section A. Opting Out of Portability.” Presumably, the IRS intended to further minimize the risk of an executor mistakenly checking the box and inadvertently opting out of portability.

The DSUE amount received from predeceased spouse(s) calculated in Part 6, Section D, includes a column for listing the DSUE amount applied by the decedent to lifetime gifts. Instead of the date of the gift as requested in the draft form, the final form requests the year of the applicable Form 709 reporting the use of that DSUE amount.

Special Valuation Rule

Estates that don’t otherwise have a filing requirement (that is, they file Form 706 solely to elect portability) don’t have to report the value of certain property that qualifies for the marital or charitable deduction. A more detailed note has been added to the top of Schedules A, B, C, D, E, F, G, H, I, M and O to direct those under the filing threshold who are filing solely to elect portability to consider whether it’s necessary to report the value of certain assets eligible for the marital or charitable deduction. If the special valuation rule doesn’t require the value of an asset to be reported, the executor must:

1. Report the asset on the appropriate schedule, but without any value on the schedule itself; and

2. Estimate in good faith and with due diligence the total value of the gross estate, using ranges of dollar values now provided in the Form 706 instructions. As you may recall, the draft instructions provided guidance for estimating the value of assets only up to $1 million. The final instructions provide guidance for assets valued up to $5.12 million, in $250,000 increments (the last increment is $5 million to $5,119,999).

Line 7 Worksheet

The IRS has amended the Line 7 Worksheet (used to determine the applicable credit (formerly unified credit) allowable for prior periods) in final Form 706. It added a column for specifically listing the cumulative DSUE amount from predeceased spouse(s) actually applied to current and prior gifts, which amount is to be taken from the gift tax return for the applicable year. Additional columns clarify that the DSUE amount applied against lifetime gifts is added to the applicable exclusion amount for the current period and multiplied by the 2012 unified rate schedule to compute the maximum applicable credit. The “total gift tax paid or payable” is determined on the Line 7 Worksheet and entered on Line 7 of Part 2-Tax Computation.

Remember to Write Neatly

Filers were previously directed not to file the Line 7 Worksheets, but to keep them for their records. Now, a specific cautionary note appears in the instructions directing the filer to submit a copy of the Line 7 Worksheet when filing Form 706.

This material is written by Lazard Wealth Management LLC for general informational purposes only and does not represent our legal advice as to any particular set of facts and does not convey legal, accounting, tax or other professional advice of any kind; nor does it represent any undertaking to keep recipients advised of all relevant legal and regulatory developments. The application and impact of relevant laws will vary from jurisdiction to jurisdiction and should be based on information from professional advisors. Information and opinions presented have been obtained or derived from sources believed by Lazard Wealth Management LLC to be reliable. Lazard Wealth Management LLC makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the date of this presentation and are subject to change.

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